Short title

This Act may be cited as the

Competitive and Open Markets That Protect and Enhance the Treatment of Entrepreneurs Act of 2007

or the

Compete Act of 2007

Definitions

For purposes of this Act, the terms audit, Board, Commission, issuer, and public accounting firm have the same meanings as in section 2 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201).

Internal control reporting and evaluation

Section 404(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262(b)) is amended to read as follows:

(b)

Internal control reporting and evaluation

(1)

Auditor attestation and report

(A)

In general

With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall, at the interval determined under paragraph (2), attest to, and report on, the assessment made by the management of the issuer. (B)

Content

The attestation and report on the management assessment required by this paragraph— (i)shall focus on the process and system management used— (I)to identify and manage risks; (II)to identify and implement key controls; and (III)to come to a conclusion on the effectiveness of the internal controls over financial reporting; and (ii)shall not include a separate opinion on the outcome of the assessment, including any pass or fail opinion by the auditor on the effectiveness of the internal controls of management over financial reporting. (2)

Intervals for attestation and report

The regulations of the Commission under this section— (A)shall require that the attestation and report required by paragraph (1) be performed during an initial reporting period, and then at 3-year intervals; and (B)may require a shorter interval in the event of a major shift in the structure or performance of the issuer, such as a merger, a significant financial restatement, evidence of fraud, or other such events, as determined by the Commission (3)

Standards for attestation and report

(A)

Risk-based evaluation

(i)

In general

An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. (ii)

Requirements

The standards issued or adopted by the Board for purposes of this subsection shall require that the audit of the management assessment of the internal controls of the issuer shall— (I)be designed, on the basis of the probability of risk and magnitude of potential harm, to focus on those controls that are critical to the accuracy of the financial statements of the issuer; (II)be consistent with the materiality standards prescribed by the Commission under paragraph (4); and (III)require that the determination by the auditor of the controls that create the greatest risk to the company shall be made in consultation with management of the issuer, and shall identify those greatest risks in consideration of the characteristics of the industry within which the issuer operates. (B)

Reliance on the work of others

The standards issued or adopted by the Board for purposes of this subsection shall eliminate duplication of audits and examinations— (i)by allowing registered public accounting firms performing attestations and reports under this subsection to rely on examinations and inspections conducted by Federal and State regulatory agencies— (I)to the extent that such examinations and inspections focus on the risk-based internal controls of the issuer; and (II)to the extent practicable, without affecting the timely completion of the examinations and inspections; (ii)where the issuer has engaged a third-party accountant to test and provide its management assessment of the internal control systems, by permitting— (I)the third-party accountant to work with registered public accounting firms performing attestations and reports under this subsection on determining the controls to be tested and the scope of the work; (II)the registered public accounting firms performing attestations and reports under this subsection to rely heavily on the work of the third-party accountant during the attestation engagement to avoid repetitive testing; and (III)management of the issuer to communicate openly with the registered public accounting firms performing attestations and reports under this subsection on all aspects of its internal controls. (C)

Definition

For purposes of subparagraph (B)(ii), the term third-party accountant means a registered public accounting firm other than the registered public accounting firm that is engaged to perform the attestation and report under this subsection. (4)

Materiality standard

The Commission shall develop a standard of materiality for the conduct of the assessment and report on an internal control under this subsection that shall be based on the relationship of the internal control to the reasonably possible effects on the financial statements of the issuer, and its significance to the overall financial status of the issuer.

Smaller public company option regarding internal control provision

Section 404 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7262) is amended by adding at the end the following:

(c)

Smaller public company option

(1)

Voluntary compliance

A smaller issuer shall not be subject to the requirements of subsection (a), unless the smaller issuer voluntarily elects to comply with such requirements, in accordance with regulations prescribed by the Commission. Any smaller issuer that does not elect to comply with subsection (a) shall state such election, together with the reasons therefor, in its annual report to the Commission under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)). (2)

Definition

(A)

In general

For purposes of this subsection, and subject to subparagraph (B), the term smaller issuer means an issuer for which an annual report is required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), that— (i)has a total market capitalization at the beginning of the relevant reporting period of less than $700,000,000; (ii)has total product and services revenue for that reporting period of less than $125,000,000; or (iii)has, at the beginning of the relevant reporting period, fewer than 1500 record beneficial holders. (B)

Annual adjustments

The amounts referred to in clauses (i) and (ii) of subparagraph (A) shall be adjusted annually to account for changes in the Consumer Price Index for all urban consumers, United States city average, as published by the Bureau of Labor Statistics.

Competition for auditing services

(a)

Study required

The Commission and the Board shall jointly conduct a study examining the lack of, and impediments to, robust competition for the performance of audits for issuers. (b)

Subjects of study

The study required by this section shall examine— (1)the causes for, and the measures that may be taken to alleviate, the concentration of audit performance in only 4 large public accounting firms capable of servicing the larger issuers; and (2)the extent to which the Commission and the Board may, under existing law, take reasonable steps— (A)to increase the number of qualified accounting firms; and (B)to eliminate de minimis conflict of interest provisions. (c)

Report

(1)

In general

Not later than 6 months after the date of enactment of this Act, the Commission and the Board shall submit a joint report on the study required by this section to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. (2)

Requirements

The report required by this subsection shall— (A)contain the results of the examination of each of the subjects identified in subsection (b); (B)make recommendations to the accounting industry of measures that may be undertaken under existing provisions of law, regulations, and standards to alleviate the concentration described in subsection (b)(1); (C)identify the measures that the Commission and the Board should be authorized to undertake to alleviate such concentration; and (D)make any recommendations to Congress for changes in the laws administered by the Commission and the Board that the Commission or the Board consider appropriate and necessary on the basis of the study.

Principles-based guidance study

(a)

Study required

The Commission and the Board shall jointly conduct a study comparing and contrasting the principles-based Turnbull Guidance under the securities laws of Great Britain to the implementation of section 404 of the Sarbanes-Oxley Act of 2002. (b)

Report

(1)

In general

Not later than 1 year after the date of enactment of this Act, the Commission and the Board shall submit a joint report on the study required by this section to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. (2)

Requirements

The report required by this subsection shall— (A)compare the relative accounting and other costs of the principles-based Turnbull Guidance under the securities laws of Great Britain and the implementation of section 404 of the Sarbanes-Oxley Act of 2002, in relation to the relative reduction in the level of risk to investors and increase in the level of investor confidence in the financial statements of issuers; and (B)recommend to the Congress appropriate measures to alleviate accounting and other costs in relation to the reduction of such risk and the increase in such confidence.